Thursday, April 19, 2007

Rate Cuts This Year?

Dr. Ronald Ratajczak of Morgan Keegan & Co. states that he believes "there is virtually no likelihood that rates will be cut this year. Only a recession would do that, and even if one develops, the need for response at the expense of rising core inflation will not be accepted until next year. As I do not have a recession, I also have no need to lower rates. (The argument for a rate decline is that the adjustable rate mortgages are creating so much trouble that relief must come from lower rates. However, the adjustable rate problem is one of availability rather than price and cannot be solved without dramatic reductions in short-term rates, which are inappropriate with core inflation rates pressing higher. There will be no rate reductions.)"

"Can there be a rate increase? Of course!! Increased import prices induced by a weak dollar could add to inflation. Higher earnings abroad also could shift more of our capacity to meeting the needs of export markets, leading to price pressures at home. Even if these do not develop strongly, higher energy and food prices could raise wage pressures, which will be successful because of the tight labor markets. In other words, the odds are shifting towards a possible rate increase, although I still believe holding the line is the most likely outcome."

Strategy update: short-term overbought conditions have taken us out of commodity funds at the moment in the Dynamic Global Macro Strategy and the Dynamic Commodity Strategy. However, we continue to believe longer-term pressures on resource usage will provide positive trading opportunities for commodities and commodity-related stocks.


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